Technical analysis (TA) is one of the most used ways to analyze the financial markets. TA can be applied to essentially any financial market, whether that’s stocks, forex, gold, or cryptocurrencies.
While the basic concepts of technical analysis are relatively easy to grasp, it’s a difficult art to master.
When you’re learning any new skill, it’s natural to make a lot of mistakes on the way. This can be especially harmful when it comes to trading or investing. If you are not being careful and learning from your mistakes, you risk losing a significant portion of your capital.
Learning from your mistakes is great, but avoiding them as much as possible is even better.
Mistake 1 – Not Cutting Your Losses
Let’s start with a quote from commodities trader Ed Seykota:
"The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.”
This seems like a simple step, but it’s always good to emphasize its importance. When it comes to trading and investing, protecting your capital should always be your number one priority.
Starting out with trading can be a daunting undertaking. A solid approach to consider when you’re starting out is the following: the first step isn’t to win, it’s to not lose. This is why it can be favorable to start with smaller position sizing, or not even risk real funds. Binance Futures, for example, has a testnet where you can try out your strategies before risking your hard-earned funds. This way, you can protect your capital, and risk it only once you’re consistently producing good results.
Setting a stop-loss is simple rationality. Your trades should have an invalidation point. This is where you “bite the bullet” and accept that your trade idea was wrong. If you don’t apply this mindset to your trading, you likely won’t be doing well over the long-term. Even one bad trade can be very detrimental to your portfolio, and you might end up holding a losing bag, hoping for the market to recover.
Mistake 2 – Overtrading
When you’re an active trader, it’s a common mistake to think you always need to be in a trade. Trading involves a lot of analysis and a lot of, well, sitting around, patiently waiting! With some trading strategies, you may need to wait a long time to get a reliable signal to enter a trade. Some traders may enter less than three trades per year and still produce outstanding returns.
Check out this quote from trader Jesse Livermore, one of the pioneers of day trading:
“Money is made by sitting, not trading.”
Try to avoid entering a trade just for the sake of it. You don’t always have to be in a trade. In fact, in some market conditions, it’s actually more profitable to do nothing and wait for an opportunity to present itself. This way, you preserve your capital and have it ready to deploy once the good trading opportunities show up again. It’s worth keeping in mind that the opportunities will always come back, you just have to wait for them.
A similar trading mistake is an overemphasis on lower time frames. Analysis done on higher time frames will generally be more reliable than analysis done on lower time frames. As such, low time frames will produce a lot of market noise and may tempt you to enter trades more often. While there are many successful scalpers and short-term profitable traders, trading on lower time frames usually brings a bad risk/reward ratio. As a risky trading strategy, it’s certainly not recommended for beginners.
Mistake 3 – Revenge Trading
It’s quite common to see traders trying to immediately make back a significant loss. This is what we call revenge trading. It doesn’t matter if you want to be a technical analyst, a day trader, or a swing trader – avoiding emotional decisions is crucial.
It’s easy to stay calm when things are going well, or even when you make small mistakes. But can you stay calm when things go completely wrong? Can you stick to your trading plan, even when everyone else is panicking?
Notice the word “analysis” in technical analysis. Naturally, this implies an analytical approach to the markets, right? So, why would you want to make hasty, emotional decisions in such a framework? If you want to be among the best traders, you should be able to stay calm even after the biggest mistakes. Avoid emotional decisions, and focus on keeping a logical, analytical mindset.
Trading immediately after suffering a big loss tends to lead to even more losses. As such, some traders may not even trade at all for a period of time following a big loss. This way, they can get a fresh start and get back to trading with a clear mind.
Mistake 4 – Being Too Stubborn To Change Your Mind
If you’d like to become a successful trader, don’t be afraid to change your mind. A lot. Market conditions can change really quickly, and one thing’s a certainty. They will keep changing. Your job as a trader is to recognize those changes and adapt to them. One strategy that works really well in a specific market environment may not work at all in another.
Let’s read what legendary trader Paul Tudor Jones had to say about his positions:
“Every day I assume every position I have is wrong.”
It’s good practice to try to take the other side of your arguments to see their potential weaknesses. This way, your investment theses (and decisions) can become more comprehensive.
This also brings up another point: cognitive biases. Biases can heavily affect your decision-making, cloud your judgment, and limit the range of possibilities you’re able to consider. Make sure to at least understand the cognitive biases that may affect your trading plans, so you can mitigate their consequences more effectively.
Mistake 5 – Ignoring Extreme Market Conditions
There are times when the predictive qualities of TA become less reliable. These can be black swan events or other kinds of extreme market conditions that are heavily driven by emotion and mass psychology. Ultimately, the markets are driven by supply and demand, and there can be times when they are extremely imbalanced to one side.
Take the example of the Relative Strength Index (RSI), a momentum indicator. Generally, if the reading is below 30, the charted asset may be considered oversold. Does this mean that it’s an immediate trade signal when the RSI goes below 30? Absolutely not! It just means that the momentum of the market is currently dictated by the seller side. In other words, it just indicates that sellers are stronger than buyers.
The RSI can reach extreme levels during extraordinary market conditions. It might even drop to single digits – close to the lowest possible reading (zero). Even such an extreme oversold reading may not necessarily mean that a reversal is imminent.
Blindly making decisions based on technical tools reaching extreme readings can lose you a lot of money. This is especially true during black swan events when the price action can be exceptionally hard to read. During times like these, the markets can keep going in one direction or the other, and no analytical tool will stop them. This is why it’s always important to consider other factors as well, and not rely on a single tool.
Mistake 6 – Forgetting That Trading Is About Probabilities
Technical analysis doesn’t deal with absolutes. It deals with probabilities. This means that whatever technical approach you’re basing your strategies on, there’s never a guarantee that the market will behave as you expect. Maybe your analysis suggests that there’s a very high probability of the market moving up or down, but that’s still not a certainty.
You need to take this into account when you’re setting up your trading strategies. No matter how experienced you are, it’s never a great idea to think the market will follow your analysis. If you do that, you’re prone to oversizing and betting too big on one outcome, risking a big financial loss.
Mistake 7 – Blindly Following Other Traders
Constantly improving your craft is essential if you want to master any skill. This is especially true when it comes to trading the financial markets. In fact, changing market conditions make it a necessity. One of the best ways to learn is to follow experienced technical analysts and traders.
However, if you’d like to become consistently good, you also need to find your own strengths and build on them. We can call this your edge, the thing that makes you different from others as a trader.
If you read many interviews with successful traders, you’ll surely notice that they’ll have quite different strategies. In fact, one strategy that works perfectly for one trader may be deemed completely unfeasible by another. There are countless ways to profit off of the markets. You just need to find which one suits your personality and trading style the best.
Entering a trade based on someone else’s analysis might work out a few times. However, if you just blindly follow other traders without understanding the underlying context, it most definitely won’t work over the long-term. This, of course, doesn’t mean that you shouldn’t follow and learn from others. The important thing is whether you agree with the trade idea and whether it fits into your trading system. You should not be blindly following other traders, even if they are experienced and reputable.
Mistake 8 – Using High Leverage
Leverage is the ability to make large trades in the market with only a small amount of actual capital in your account. Brokers and exchanges offer leverage as a way to make the market accessible to the average investor.
How Leverage Can Hurt You:
Leverage can be a sharp double-edged sword. It can work for you, or against you. If you make a trade with a mini trading lot of $10,000, each pip would be worth around $1. If you gain 5 pips, everything is great, you used $50 and made a 10% return. If you lose 5 pips, you have a 10% loss just as fast.
While it is really nice to think about the money you can make, the money that can be lost is rarely discussed. Leverage can be very dangerous if used improperly. Brokers can offer heavy leverage, but that does not mean that you are forced to use it all the time. Many traders often use less than 5 times leverage. While the possible gains are smaller, so are the possible drawdowns.
Many traders lose their entire account due to high leverage. Exercising proper risk management is key when trading.
The dangers of using too much leverage are rarely talked about but are pretty obvious if you think about it. This doesn’t mean that you have to use the full amount of leverage just because it’s there. In fact, there are ways to use leverage in useful ways that will give you an advantage.
A good time to use leverage is when adding to a winning trade. If you have a trade that has progressed favorably and you want to add to it, this is a good use of leverage. This is called leveraging your profits.
Overall the best use of leverage is when position trading. It’s tempting to use extreme leverage to make a fast profit on single trades, but the risks are just not worth it. This is especially true given that the future is uncertain.
Mistake 9 – Holding Leveraged Tokens
Leveraged tokens, much like the name suggests, are tokens that give traders and investors a leveraged position in trading. This would mean that earnings and losses multiplied while using such tokens. Unlike traditional trading methods, leverage coins are usually ERC-20 tokens that offer leverage to holders. Leveraged tokens are found in Crypto trading exchanges.
Some exchanges falsely advertises leverage tokens as a safe way to invest while being exposed to leverage. That is totally misleading since leverage tokens carry almost the same risk as leverage.
The danger of leverage tokens is in the fact that they lose value rapidly due to their rebalancing mechanism.
For example, when the price of leveraged tokens falls below 0.05, or when the price fluctuates substantially below 0.05, the reverse split mechanism will be triggered. The reverse split multiples are generally 20, 30, 50 times, etc. Let us take 50 times as an example.
Before the reverse split, assume that the user holds 1,000 leveraged tokens, the net value of the token is 0.03, and the corresponding asset is 30 USDT. After the reverse split, the user holds 20 leveraged tokens (1000/50=20), and the net value of the token is 1.5 (0.03*50=1.5), the corresponding asset is 30 USDT. The reverse split will not affect the total assets, but it will reduce the number of positions held. Therefore, it is not recommended to buy when the net value of the token is low. The price of the token can continue falling due to reverse split.
When the depth of the Future market is much shallower than that of the leveraged token holdings, in order to avoid excessive slippage in the rebalancing and causing losses to the token holders, it may happen that the rebalancing cannot reach the target leverage multiple.
Leveraged tokens can avoid the liquidation process in its traditional meaning, but if you misjudge the market and the price increases/decreases to the opposite direction, you may lose a lot if not all your investment beyond recovery. Even if the price returns to the normal range again, due to rebalancing mechanism, the price needs to increase/decrease more to cover the loss which in many cases it won’t.
Therefore, leveraged tokens are more suitable for very short-term investment and trading. In addition, there may be a situation where both Long and Short Leveraged Tokens lose at the same time in the extreme fluctuation, please pay attention to investment risks before trading.
Every exchange has its own rules when it comes to leverage tokens but generally speaking storing them is a big mistake. They are only mere tools for short-term day trading.
Mistake 10 – Not Using Proper Risk Management
Learning the art of risk management is essential when trading. You have to know your risk and adjust your position properly before trading or taking any position.
We have created a full guide on risk management and position sizing which you can read at:
Mistake 11 – Not Having A Well-Tested Strategy
Trading randomly would always lead to failure. It is always required to have a properly defined and well-tested strategy for trading and position sizing before you start trading with a real account.
Every strategy has to be tested for at least 300 times before using it. It is also recommended to forward test it with a demo account for at least a month before using it in a real account.
If you like to learn the trading strategies that we use at AlgoStorm.com, join us at:
Mistake 12 – Trading Without Any Fundamental Analysis
Fundamental analysis is a method of evaluating the intrinsic value of an asset and analysing the factors that could influence its price in the future. This form of analysis is based on external events and influences, as well as financial statements and industry trends.
Fundamental analysis helps traders and investors to gather the right information to make rational decisions about what position to take. By basing these decisions on financial data, there is limited room for personal biases.
Rather than establishing entry and exit points, fundamental analysis seeks to understand the value of an asset, so that traders can take a much longer-term view of the market. Once the trader has determined a numerical value for the asset, they can compare it to the current market price to assess whether the asset is over- or under-valued. The aim is to then profit from the market correction.
Before trading an asset, you have to do at least a basic fundamental analysis on it before investing in it or trading it.
Here at AlgoStorm.com, we only trade high market cap assets with very strong fundamentals and extremely high daily volume (e.g. Top 10 Cryptos by market cap).
If you like to check which assets our team is trading or investing it, you can join us at: